Three years ago, pictures of bulk carriers lined up off the coast of Mackay, Australia, were framed as evidence of a “renaissance” in the coal industry.
There were more than 70 coal ships in the offshore gridlock in December 2017. This year, there were just 12 waiting — equaling a record low set at the height of the COVID-19 pandemic.
At the world’s biggest coal export port in Newcastle, England, no China-bound ships are waiting or scheduled to load before Christmas. More than 50 ships carrying Australian coal are reportedly waiting off the Chinese coast.
Illustration: Mountain People
In the face of falling coal prices and volumes, the industry and governments have remained bullish about coal’s long-term prospects.
They have said that the twin pressures of the pandemic slowdown and China’s ban on Australian coal would ultimately pass.
In an apparent show of faith, the government of Queensland, Australia, took a 9.9 percent stake in a float of Dalrymple Bay Infrastructure (DBI) — one of two large terminals in Mackay, the main hub for exports from the Bowen Basin.
The investment was welcomed by the resources sector as “a clear vote of confidence ... in the role of resources in Queensland’s COVID-19 recovery and economic growth for decades to come.”
DBI’s initial public offering (IPO) took place on Wednesday last week on the Australian Securities Exchange with government backing and the broader market surging. It was the second-biggest Australian IPO this year (the largest, tech company Nuix, gained 63 percent on its debut the previous week).
DBI also promised investors a handsome 7 percent dividend.
When the stocks hit the market, DBI tanked, down 16 percent. It gained no ground the following day. Investors were not buying the pitch that coal has a rosy future.
“It’s a pivotal moment,” said Tim Buckley, an energy markets expert at the Ohio-based Institute of Energy Economics and Financial Analysis. “The financial markets do move so much faster than the real world. They are all about constantly re-evaluating the risk-return and growth prospects. There’s no long-term growth prospect at all for the [coal] industry. It’s like trying to catch a falling knife.”
BLEAK OUTLOOK
Australia’s biggest pension fund, Australian Super, has committed to hitting net-zero emissions across its A$200 billion (US$150.41 billion) investment portfolio by 2050 — but has not specifically ruled out investing in coal projects.
Nonetheless, Australian Super chief executive Ian Silk seems less than enthusiastic about the idea.
“The economic outlook for coal stocks generally is incredibly bleak, for obvious reasons,” he said. “It’s pretty plain by the way we’re so underweight coal that that’s not an attractive sector.”
Silk is not alone. Institutional investors — the big pension funds and other piles of money that provide much of the capital that businesses need to operate — have increasingly turned away from coal and other fossil fuels.
Norway’s Government Pension Fund Global, which at US$1.2 trillion is so big that it holds about 1.5 percent of all of the shares in listed companies in the world, has strict rules forbidding it from investing in companies that produce more than 20 million tonnes of thermal coal per year, or produce power of more than 10,000 megawatts per year from burning coal.
As a result, in May, it excluded from investment two big multinationals that mine coal in Australia, Glencore and Anglo American, as well as Australian power company AGL Energy.
It also put BHP on notice that it could dump its stake in the Big Australian if it did not get out of thermal coal.
In Australia, the big banks have displayed an increasing unwillingness to lend to coal, with ANZ in October saying that it would not write new loans to businesses with more than 10 percent exposure to thermal coal, while existing customers with more than 50 percent exposure would be required to show it “specific, time bound and public diversification strategies” to continue receiving the bank’s cash.
The harder line from banks followed warnings from their regulator, the Australian Prudential Regulation Authority, that they needed to consider climate risks when making decisions.
In 2017, regulator member Geoff Summerhayes laid down its position in a speech that was met with howls of dismay and derision by some.
Last week, he said that the criticism “was good impetus for me to actually go harder, because it’s very much a financial risk with real prudential implications.”
A BELLWETHER
The failure of Australian coal prospects to re-emerge from the pandemic might be easy to blame on the situation in China, but there are growing signals that the industry is heading into its final bust cycle.
A few days before the Dalrymple Bay terminal was floated, the largest coal producer in Australia and the Western world, Glencore, released its annual investor update and — critically — announced new plans for a “managed decline of its coal business” and net-zero emissions by 2050.
While those plans are ultimately long-term (and also play to the company’s strategic interest by seeking to keep prices at viable levels by constraining supply) they also show that the company expects volumes to drop substantially — up to 20 percent — in the next few years, compared with previous projections.
The same investor update last year envisaged Glencore would produce 140 million tonnes of coal in 2022. Now the company only expects to mine 115 million tonnes that year. It might consider mine-life extension projects, but has no plans to develop new coal mines.
Coal is also on a decline at Australia’s two big mining companies, BHP and Rio Tinto, which have turned away from the black rock and toward red ones, as the price of iron ore continues to soar.
Rio Tinto sold its last Australian coal mine in 2018 and, under pressure from investors, BHP has promised to get out of thermal coal — burned in power plants — within two years, but so far has found no buyers.
Of particular concern to miners in Queensland is the way that financial markets have treated metallurgical (or coking) coal, which is used in steelmaking. More than 80 percent of the exports from Dalrymple Bay are metallurgical coal.
In the days before the DBI float, company chief executive Anthony Timbrell told the Australian Financial Review that it would seek to emphasize the difference between metallurgical and thermal, or energy producing, coal.
“I guess it’s our job to draw out that story and remind people of the complexity,” Timbrell said.
Thermal coal is the primary target of environmental advocates, while metallurgical coal is less susceptible in the immediate-term to a global energy pivot toward renewables.
BHP has also been eager to draw the distinction, which is in its financial interests to do, as metallurgical coal attracts a higher price than thermal coal.
However, as excitement builds around the prospect of — as yet, not commercialized — steelmaking alternatives such as green hydrogen, the financial markets increasingly appear to be making little differentiation between the classes of coal.
Buckley pointed to a graph comparing the US and Australian metallurgical coal producer Coronado with Australian company Whitehaven, which largely mines thermal coal.
Since Coronado was listed in 2018, both Coronado and Whitehaven’s shares have dived almost in harmony by about 65 percent. The Hong Kong All Ordinaries index is up about 20 percent over the same period.
“The financial markets are no longer really differentiating between coking coal and thermal coal,” Buckley said. “Dalrymple Bay is a really interesting bellwether for Queensland. Having already been priced down, having failed to get institutional support, taxpayers effectively did a bailout.”
“The vendor [Brookfield Asset Management] is the most successful investor in energy infrastructure, and you don’t buy from the most successful energy investor in the world and think you’re getting a bargain,” he added.
“This isn’t a resources sector problem either, this is a coal problem,” Buckley said. “The Australian resource sector is having the best year in history: Iron ore prices are at phenomenal highs. It’s the fossil fuel sector that’s on its knees.”
END OF THE LINE
ICRA Rolleston — the coal company run by John Canavan, the brother of Australian Minister for Resources Matthew Canavan — went under earlier this month.
The company is a junior joint venture partner with Glencore in the Rolleston thermal coal mine in Queensland.
Glencore is to continue to operate the mine, but a court case finalized last month showed how the collapse in the coal price had turned the mine into a loss-making venture.
John Canavan’s share of the mine’s costs were about A$14 million more than sales revenue in August, and Glencore expected another A$4 million shortfall by the end of the year.
The Queensland Exploration Council — an offshoot of the state’s Resources Council — last week released a report card showing some growth in spending by coal speculators during the 2019-2020 fiscal year, saying that there was “definitely a feeling of growth and optimism in the sector.”
However, in the detail of its report, the council for the first time in four years downgraded its view on coal prices, saying that prices had become “a cause for concern.”
In its IPO prospectus, DBI told potential investors about a series of “risks,” including its customers collapsing due to low coal prices, or long-term decline in global coal demand.
Its most significant new investor, the Queensland State Government, in September released a study that stated: “There is a substantial degree of uncertainty” about assumptions used to underpin long-term market projections, including about the price of coking coal.
“The Queensland Treasury’s analysis highlights that Queensland’s future coal demand will continue to be primarily linked to key economies in Northeast and Southeast Asia. In particular, the future demand for Queensland’s metallurgical coal likely hinges on demand from the world’s two largest coal consumers, China and India,” the study said.
DBI’s warnings included that ongoing political tensions between Australia and China could ultimately result in a decline in coal exports from the port.
“Demand for metallurgical coal or coal generally might reduce over a period of time due to a variety of reasons, including reduced demand from key coal export markets, such as China, Japan, Taiwan, South Korean and India,” the study added.
In addition to China’s import restrictions, China, Japan and South Korea — Australia’s three largest coal customers — each announced aggressive pivots toward net-zero emissions this year.
Adding to DBI’s troubles is the nature of its business — where contracts with exporters are regulated by a competition authority.
The port’s capacity is fully allocated. Unable to raise prices or attract new customers, its pitch to investors has been about expanding its capacity to grow the business, even as shipments are being shunned by China, export volumes contract, coal companies collapse and other Queensland ports face severe debt problems.
Of those terminals, Wiggins Island at Gladstone and the Abbot Point terminal near Bowen, owned by Adani, have been operating at well below design capacity for all of this decade, which Buckley and others have said shows that any expansion of Dalrymple Bay is not viable.
Abbot Point — where Adani’s debts are estimated in excess of A$1.5 billion — typically has a line of about three coal ships, but last week, there were no ships waiting to enter the port.
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